Why Do They Do It?

Pretty much every day, in pretty much every newspaper in the country, there is a story that goes something like this [taken from todays WSJ]: "Yesterday, the Dow Jones industrials fell xxx points to yyyy on new concerns about interest rates and anxiety over North Korea's missile tests." Or the Dow rose, due to "increasing optimism about prospects for peace in the Mideast." Or whatever. It's complete and utter nonsense. The market did in fact fall yesterday. But how could anyone possibly know that it was due to "concerns about interest rates," or "anxiety about North Korea's missile program"? Hundreds of thousands -- millions -- of individual trading decisions go into determining whether the market goes up or goes down on any given day. I don't get it -- I really don't. Are we really so desperate to believe that we can explain everything that we take some sort of comfort from stories like these?

Jody (mail):
I think they take a survey.
7.5.2006 9:49pm
KurtComments (mail):
They do it because most people believe whatever "experts" say and pay for their advice. If stock market analysts were honest, they'd be out of a job.
7.5.2006 9:57pm
PinkSheets (www):
It's totally bogus most of the time except when it's clearly obvious, such as the market plunging immediately after some big news (or in the past, Greenspan saying something unexpected). People have gotten accustomed to hearing some reason, no matter how far fetched. Imagine two competing news sources: one of them does this, the other says nothing. People will choose the additional info, even if it's nonsense. It's maybe a few notches above astrology.
7.5.2006 10:00pm
Mark H.:
"They [investors] want to believe that somebody really knows. A world in which nobody really knows can be frightening" -- Alfred Cowles of Cowles/S&P Index.

As quoted in "Capital Ideas" by Peter Bernstein.
7.5.2006 10:03pm
MarkW (mail):
Why do they do it? So that economics professors will have abundant examples of one of the very first topics taught in an introductory course, the post hoc fallacy. :)
7.5.2006 10:07pm
KurtComments (mail):
Daniel Dresner links to a Bloomberg article about the financial markets reacting to the N. Korean missile tests:
Even brainy people with Doctorates From Famous Schools believe this stuff!
7.5.2006 10:08pm
Cornellian (mail):
Perhaps they do it because they can't bring themselves to print a story that states "The Dow dropped 300 points today and we have no idea why."
7.5.2006 10:13pm
Veggie_Burger (mail):
A nuclear tipped missile launched from North Korea and headed toward Los Angeles would probable cause the biggest sell-off in history. We are all hoping that it happens after we are dead and buried. Hope must spring eternal, because the future looks bleak to me.
7.5.2006 10:21pm
They're just doing their part to divert attention from the Illuminati Conspiracy to debase our currency and destroy the republic.
7.5.2006 10:22pm
Jim Rhoads (mail):
One thing about the stock market of which I am almost certain at least to a reasonable degree of scientific certainty:

For the reason the stock market goes up or down in most days, your guess is as good as mine.

A case in point is when the employment figures come out.

If there is less unemployment, and the SM goes down, it is because "...the economy is too hot, and there is a fear the Fed will raise interest rates". If the SM goes up, it is because "...the market is encouraged by the robust economy".

Conversely, if there is more unemployment, and the SM goes down, it is because, "...the market is disappointed in the employment figures". If the SM goes up, it is because, "the economy is taking a healthy pause, so the fed is unlikely to raise interest rates this next go 'round".

What a bunch of BS
7.5.2006 10:29pm
TigerHawk (www):
I'm not so sure it is quite the nonsense you suggest. It is certainly true that it is very hard to say in advance what the effect will be of a particular bit of news. That is quite different than looking at a chart of the day's trading against the release of specific news, whether a government report, the launch of a missile, or a pronouncement from a member of the Federal Reserve Board.

Also, the changes in the market's direction intraday do not necessarily reflect "millions" of individual trading decisions (unless you count omissions to trade, which really isn't fair). The price of a stock or the market changes based on marginal trades. A few big buyers or sellers can cause the chart to zig or zag fairly specifically.

Lastly, remember that there is actually a lot of discussion that goes on in the market. People rarely telegraph what they are going to do or why in advance, because that costs them, but they often give a reason after they have done their trade. If the stock of an individual company moves in a surprising direction, it is possible to call the market-makers and ask them what is going on. They will often be able to tell you in detail.
7.5.2006 10:42pm
Jim Rhoads (mail):
Yeah, Tiger, but I suspect there is also some disinformation going on too, and a bit of rationalization as well.

My problem is that on a daily basis, except when there is a big move, each commentator often has a different rationale for the day's movement.
7.5.2006 10:50pm
Human beings have a tremendous capacity for myth. And we have great difficulty with the concept of randomness.
7.5.2006 11:04pm
denton (mail):
ReaderY nailed it: There is a ton of normal, random variation in the market. Random variation contains no information. Any story you make up about it is as good as any other story you make up.
7.5.2006 11:11pm
It's an impulse as old as human history. "The markets went up today because Zeus was feeling exuberant" just sounds better than "the markets went up today because that was the collective result of millions of random walks." Randomness is deeply troubling to most, which is why most people are bad at estimating risk.
7.5.2006 11:18pm
Bottomfish (mail):
Merely to say the DJIA was up or down so many points on high, moderate, or low volume is boring to most people. They aren't interested in facts alone; they want to see them relate to human concerns, so that the market has some color, some relation to human events.

There was an article by Daniel Gross in Slate arguing that the Dow rose 127 points on October 25, 2002 because the late Senator Paul Wellstone died that day. Gross noticed that there was no visible market trend that day until the news of Wellstone's probable death around 1:30 pm, when it was reported that a private plane carrying him had crashed. The Dow then began to rise and continued to rise as it became clear that no one in the plane had survived and the event was reported in more and more outlets.

Gross connected this to the increased likelihood of Republicans re-taking the Senate. I am not at all sure of this since Minnesota usually votes Democratic anyway, or at least used to do so. Wellstone's replacement in the Senate race was Walter Mondale, who certainly had a splendid reputation among liberals (even if he was a bore). Why assume that Republican Norm Coleman would win?
7.5.2006 11:22pm
Tony (mail):
Funny, I asked the exact same question three years ago in my own blog. Didn't get a satisfactory answer.
7.5.2006 11:24pm
David Cohen (mail):
You've already gone too far. Before worrying about why the market did whatever it did, we need to figure out why we accept the performance of 30 big stocks, put through a somewhat odd calculation, as the "market"?
7.5.2006 11:27pm
juris_imprudent (mail):
Are we really so desperate to believe that we can explain everything that we take some sort of comfort from stories like these?

Yes. Most humans want order, not chaos. Even if order is a fiction, even if it defies all reason (perhaps all the better that it do so). A person sees such an article and is comforted that someone knows why the market went up (or down). One of the most amusing conceits of modern man is that myths are a relic of our more primitive forebears.
7.5.2006 11:36pm
I've always wanted that job at some newspaper large enough to overpay me for it.
"The Dow (rose/fell/other descriptor of varying hysteria) today on news that (insert todays headline here)."
Applies to the price of any commodity, such as gas or bread as well.
I bet you could even use this technique...
"Todays temparatures (insert hysterical descriptor here) as a result of (insert todays headline here). Bush blamed.
Sulzburgers got nothing on me.
7.5.2006 11:47pm
lucia (mail) (www):
My favorite is the market dropped due to profit taking. The translation is: The market dropped today after rising yesterday.
7.5.2006 11:51pm
cxmmc (mail):
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7.6.2006 12:27am

I don't get it -- I really don't. Are we really so desperate to believe that we can explain everything that we take some sort of comfort from stories like these?

Hey. It's on TV. It must be true, whatever "it" is.

Why do they put it on TV? Hint: 24/7 broad casting, dead air is a bad thing, if it bleeds it leads, "give me bang bang."

What is it actually? Remember hubcaps? Think of a coupla rocks between the hubcaps and the wheels as the car rolls down the street.

...Of course, it could simply be an illustration of the old maxim...give a bunch of monkeys typewriters and eventually they will produce x.
7.6.2006 12:39am
And this has what to do with soccer?
7.6.2006 1:09am
"If you look at soccer and the way that it's played, whether it's in the men's game or the women's game, it's fascinating. We're moving a ball up and down with our feet." US women's soccer coach

7.6.2006 1:24am
David M. Nieporent (www):
Isn't it obvious? It's the JewishZionistNeo-Con conspiracy, trying to divert attention from the fact that they control the market.
7.6.2006 3:13am
Syd (mail):
I've always felt that if the stock market rises or falls 1% in a day, it's not significant, but if it falls 10% in a day, or over a month even, it probably is, and there's probably a logical explanation.
7.6.2006 4:00am
anonymous coward:
"The market did in fact fall yesterday. But how could anyone possibly know that it was due to 'concerns about interest rates,' or 'anxiety about North Korea's missile program'?"

Trade through a few numbers (e.g. unemployment Friday) and news events; the reactions will tell what the market fears.

Now, some of these market reactions (for example the apparent correlation between gold and oil these days) don't objectively make a heck of a lot of sense...but they're self-reinforcing for a time. The operative term is "market regime."

(And, yes, traders can and do kick the market around in the absence of any news.)
7.6.2006 5:53am
Here's another idea. Some small number of stockholders see the news as bad, and sell. Another small number think that some other number are going to sell, so they sell (first-degree effect). Yet another small number think that a small number is going to think - but need I go on? Put all those small numbers together and you have enough from a vast amount of trading to move the market down 1%.
7.6.2006 6:30am
Bottomfish (mail):
Someone said that it makes no sense that "the market" (thousands of stocks)should be adequately represented by the DJIA (thirty of the biggest stocks). But there are other ways of measuring market behavior such as advances versus declines, new highs versus new lows, advancing volume versus declining. Most of the time these indices correlate pretty well with each other and with the DJIA. That is, most of the time, aside from the effect of news about a specific company or industry, stocks move pretty much in unison. When they don't, this is seen by investors as a market opportunity.
7.6.2006 6:57am
A fine scotch (mail):
Plus, most investors I know don't care what happens to the market on a daily basis. TRADERS, on the other hand...
7.6.2006 8:52am
Isn't this what Keynes called "Animal Spirits"?
7.6.2006 9:09am
Alan Gunn:
The worst manifestation of this is explaining a drop in the indexes following a rise as "profit taking." There are real data on this, and they disprove the "profit taking" story: there's little if any correlation between those who sell on the down day and those who made money on the earlier increase. But the TV people can be counted on to give this explanation.
7.6.2006 10:39am
jimbino (mail):
And sometimes the market rises or falls because of what didn't happen, especially if it was widely expected to happen. I find it particularly annoying to hear "The DOW is down x points" when I really would like to know what its value is.
7.6.2006 11:30am
jallgor (mail):
Tigerhawk nailed it. There are actually a relatively small number of entities who move the market on a given day and those people talk to each other about why they are selling or buying. Think about it, it's not as if they are trying to predict a market movement. They are simply witnessing a move and then asking the people who bought or sold why they did it. That doesn't mean they always get the news reports right but in theory they could if they asked enough of the right people.
7.6.2006 12:04pm
Robert Ayers:
There is a guy who works for the newpaper. The head in the financial section is his responsibility. Every night, he has in his hands the ticker results and the news stories and he has to create the financial head. If he doesn't come up with one, the paper looks really funny the next morning.
7.6.2006 1:42pm
"ReaderY nailed it: There is a ton of normal, random variation in the market. Random variation contains no information. Any story you make up about it is as good as any other story you make up."

Individual stock movements are not random. That does not mean, however, that the movement in "the market" can easily, or correctly, be explained by 1 or 2 events of the day. Individual stocks can. Sectors nearly as often. The entire market rarely.
7.6.2006 5:01pm
Jerryh (mail):
If you watch the WSJ throughout the day you will see things like: "The market dropped at opening as experts perused the latest employment figures..." Then if the market turns around in midmorning the first three words will change to: "The market rose as experts etc." This will change 5 or 6 times during the course of the day depending on which way the market is going. Same article just different first 3 words.
7.6.2006 6:28pm